Resources

FBCG Blog

When family members share a business, it does much to strengthen the family bond. However, passing a business from one generation to the next often affects the solid family bond and results in breaking it.

6 / Sep / 2016

Op-ed by His Excellency Abdulaziz Abdulla Al Ghurair is chairman of Family Business Council- Gulf, a member of the Family Business Network International

When family members share a business, it does much to strengthen the family bond. However, passing a business from one generation to the next often affects the solid family bond and results in breaking it. Very few family businesses – 15 per cent according to international studies – survive to the third generation. Family business succession is arguably one of the most critical issues a family business has to face; it is also one of the most difficult aspects to plan for.

So why is succession planning a difficult topic to tackle? Perhaps because the topic of succession is akin to conversing about a parent’s death or about them getting old – subjects that are not favorable and family members would like to avoid out of deep respect. Succession planning also refers to other sensitive topics like how wealth will be passed on from one generation to the other; how will business be run by the new leadership; what is the next generation involvement in the business; who will lead the business, etc. Family members’ assessment also enter the equation – how will siblings and cousins evaluate each others performance if they work in the same business?

Inevitably, however, there is no escape from tabling these topics by the family. Tackling these issues early on and clarifying a structure that will be followed for a transition of leadership and wealth is fundamental for the continuity of the business.

So how should a family proceed?

1. Family governance:

As the family business grows, more people are involved and similar interests might no longer be aligned. Hence, what was achieved in informal small family gatherings is no longer possible. A formal and clear structure needs to be put in place. A governance structure acts as a formal policy for family members to resort to for key functional areas: communication, next generation employment, decision-making, dispute resolution, and leadership succession. According to the GCC family business study the Family Business Council has completed in cooperation with McKinsey, over 66 per cent of family businesses reported that they have started to put the building blocks for family and corporate governance in place. However, only around 33 per cent reported that the practices are fully adopted and are working effectively. According to the study the families that have been most successful are those that engage adequately the broader family, not just those who are in positions of authority

or involved in the business, to ensure their buy in and commitment.

They also have recognized that setting family governance is an evolutionary journey, and are willing to take it gradually.

2. A legal structure that holds to the test of time:

Family businesses need to start the process of aligning ownership, as it gets complicated when the next generation starts having families of their own. I believe that businesses should review the current legal structure in terms of future vision for the family, businesses, transfer of wealth, and consider an ownership structure that best fits their situation. The structure should clarify ownership rules and insulate the business from any risks arising from a spill over of business and shareholder issues.

3. Developing the next generation:

Many family firms in the GCC are approaching a critical phase in growth with 52 per cent moving from the second to third generation. We need to develop and prepare our next generation early on so they build the ‘attachment’ required for the business. They need to better understand the roles and responsibilities of an owner and a manager and the commitment it entails to join the family business. It is necessary to foster an open and honest discussion with the next generation about what they want parallel to what the family business entails.

Moreover, the journey of integration into the business should be handled carefully. This process is the responsibility of not only the owner but also the responsibility of key personnel in the company. While a training period should come first, eventually the next generation should be provided with space to exercise their leadership position and should equally be provided with a zone of trust to make decisions. In fact, succession planning and the introduction of young dynamic leaders are essential to sustain business innovation in this fast paced competitive world.

I encourage you to think in generations rather than quarters and set the stage for our next generation to excel and eventually take over. Moreover, don’t hesitate to seek governance expert support whenever is needed, or to consider learnings from other family businesses. You can also be part of our community at The Family Business Council – Gulf; we address key topics related to the continuity of GCC family businesses through various activities: an annual summit we hold in April, education workshops, and other smaller knowledge sharing meet ups.